Published: 16 August 2010.

Contributed by Michael Kleinschmidt of MacGillivrays Solicitors

The Adjudicator’s decision in Seapoint CTS 8504 (0955-2009) adds two important new factors for consideration when Bodies Corporate change from the Standard Module to the Accommodation Module.

Facts
The Seapoint resident unit manager (“Manager”) had negotiated with the Body Corporate over several months to obtain an extension of the management rights agreements, at the same time as the Body Corporate was changing over from the Standard Module to the Accommodation Module.

The Manager’s discussions with the Body Corporate culminated in the owner of the Manager’s unit putting two motions to the owners for consideration at the annual general meeting. The first was a motion to change to the Accommodation Module. The second motion, to be voted upon only if the first succeeded, was to enter into fresh management rights agreements for a term of 15 years.

There were 24 lots in the Scheme and at the annual general meeting both motions were passed. The first motion, as required, was passed by special resolution. After the annual general meeting a disgruntled unit owner (“Applicant”) lodged a dispute resolution application seeking to void the decision of the Body Corporate to change from the Standard Module to the Accommodation Module. The Applicant’s primary argument was that as at the date of the annual general meeting the lots in the Scheme were not “predominantly accommodation lots”, as required under the Accommodation Module.

The question
The Applicant relied heavily upon the Carrington Court decision. Particularly the Applicant argued that the relevant threshold was 75% of the lots being “accommodation lots”. The Applicant further argued that the lesser standard in 19th Avenue was not applicable as Seapoint was not a resort; it did not have the sorts of facilities and Scheme land dedicated to a hotel or resort operation that was apparent in 19th Avenue.

As at the date of the annual general meeting 14 lots were in the Manager’s letting pool, one was let by an outside agent, one was occupied by the Manager, two were owner occupied and six were used casually by or at the direction of their owners (“Lock Ups”). This break-up was accepted by the Adjudicator and the question then became: Which of the lots could be considered “accommodation lots” for the purposes of the Accommodation Module? The arguments
Acting on behalf of the Manager I submitted that:
1. The Manager’s unit ought be an accommodation lot because it was used for the accommodation business. In the alternate the Manager could have structured the purchase of the management rights so that the Manager’s unit was subject to a residential lease (between the Manager and an associated entity).
2. Three of the six Lock Ups should be considered accommodation lots because their owners had provided letters confirming that they were “immediately available for residential accommodation”. In other words the owners of those lots regarded them as being in a condition (for example as to personal effects, furniture and the like) which would enable them to be let out “immediately”. This was backed up with further submissions that: (1) Any Lock Up should be considered an accommodation lot if:

(a) there is no legal or other impediment to it being immediately let for residential purposes – for example, a town planning restriction; and
(b) there is no physical impediment to the lot being used for a residential tenancy – for example it could be made available for occupation by a tenant at least as quickly as any other lot already in the letting pool (i.e. after a 30 minute room clean); and
(2) The best evidence as to whether a lot was an accommodation lot is that provided by the lot owner – because only the lot owner is fully aware of the legal status and physical state of their lot at any given point in time.

3. One of the permanent owner occupier lots should also be considered an accommodation lot on the basis that its owner, having been overseas for a prolonged period, also provided a letter indicating that his lot was “immediately available” for residential accommodation. Taking into account the lots in the letting pool (14), the Manager’s unit, one of the two owner occupied (but absentee) lots, the lot let by the outside agent and three of the six lock-ups, the total number of units in the letting pool was submitted to be 20 out of 24 (or 83.3%). On behalf of the Manager I further argued that even if the Manager’s characterisation of lots as accommodation lots was wrong, just as in 19th Avenue the majority of lot owners were investors. Despite the small size and comparative lack of on-site facilities within the Scheme, Seapoint should be considered a resort project (where the majority of owners were investors) because of its location and design (having regard to its age).

The answer...? The scene was set for further consideration of just exactly what “immediately available to be the subject of a lease or letting for accommodation for long or short term residential purposes” means. This is of course the critical phrase from the definition of “accommodation lot” in Section 3(3) of the Accommodation Module.

Disappointingly, but not unexpectedly, the Adjudicator did not directly answer this question. Instead the Adjudicator considered the 19th Avenue decision to be the most relevant and thus avoided the application of a hard and fast percentage and instead considered the qualitative factors.

The Seapoint CTS was established in 1985 and less than a month after establishment the bylaws were amended, by a resolution without dissent, to authorise the Body Corporate to enter into management rights agreements with a Manager to be resident within the Scheme. The Scheme’s by-laws therefore had a 25 year history of supporting the conduct of a management rights business on-site.

Further, while the Adjudicator took into account that 15 lots were unquestionably accommodation lots (62.5%) he also considered that only 2 were owner occupied (8.3%). The lack of owner occupiers supported a conclusion that a majority of owners were, in fact, investors.

The Adjudicator found that the lots in the Scheme were predominantly accommodation lots as at the date of the annual general meeting. However before determining that the lot owner’s resolution to change to the Accommodation Module was valid, the Adjudicator first had to also consider the Applicant’s other arguments. Those arguments were that:
1. the material provided to the lot owners for the annual general meeting by the Manager was either misleading or incomplete; and
2. the Committee had failed to address the Manager’s information or indeed, as the Applicant asserted it should, to play ‘devil’s advocate’. The Adjudicator found that the meeting materials were not misleading and noted that the decision to change to the Accommodation Module was a decision reserved to the lot owners in general meeting. Accordingly the Committee had no particular obligation to inform the lot owners of the advantages or disadvantages associated with changing over to the Accommodation Module. In short it was the lot owner’s responsibility to inform themselves, not the Committee’s.

Accordingly the Adjudicator dismissed the application and both of the resolutions to change to the Accommodation Module and to grant the new management rights agreements were allowed to stand.

Conclusion The decision is important as it clarifies the Committee’s role in relation to a proposal to change modules as well as providing two more critical factors to justify a change to the Accommodation Module; those being a long standing history of management rights in a Scheme and a lack of owner occupiers. These factors can be critically important in smaller Schemes where the inclusion or exclusion of one lot from the letting pool can mean a large change in the percentage of “accommodation lots”. A long history of operating management rights, along with very few owner occupiers can now mean that the number of accommodation lots required to adopt the Accommodation Module falls below the two thirds threshold in 19th Avenue.

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